To an outsider it seems like a simple operation. Not to mention astonishing. Do no advertising. Orders flood in from around the globe. Be loved by everyone. And work just one month out of the year. But the truth is that Santa Claus’s operation is much more complicated and not always so jolly. The amount of things that can, and do, go wrong is legion. Few know this but the bearded one has an insurance program as complex as that of a drug manufacturer.

It wasn’t always this way. “Why on Earth would I need insurance?,” Santa would say to the insurance agents constantly making pitches to him while their kids were bouncing on his lap. “Insurance? Who would sue Santa Clause?,” he would ask incredulously while letting out a big belly laugh.

But times change. In ‘68 some heathens in Philadelphia booed Santa. And two years later someone did the unthinkable and sued Santa. The reindeer came in for a hard landing and damaged a few shingles on a roof. It was minor. But Santa got dragged into court -- mumbling all the way about no good deed going unpunished. After that Blitzen bit off a kid’s finger and the family was pretty frosty. The floodgates were now open. Insurance became one of Santa’s biggest expenses. He stopped delivering gifts to trial lawyers’ houses.

For the past four decades Santa’s insurance has been written by Arctic Insurance Group. But despite all of Arctic’s promises to bail him out of trouble, it has been quite the opposite. Santa’s success at getting claims paid has resembled that of the Cubs. And the reason for this is easy to explain – for the past 33 years Santa’s claims were assigned to the Insurance Grinch. The Insurance Grinch found just about every way possible to disclaim coverage for just about every claim that Santa presented. His skills were unparalleled. When Santa began to get inundated with claims for knocking out Dish Network service with his sleigh, the Insurance Grouch disclaimed coverage on the basis of the aircraft exclusion. Wow! Now that’s impressive.

Good news for Santa -- the Insurance Grinch recently retired. He’s headed to Minnesota to enjoy the warmer weather. He bought a house in a neighborhood with lots of kids so he can tell them to get off his lawn. Even though the Insurance Grinch is not a subscriber – he finds that Randy Spencer column to be annoying -- he agreed to give an exclusive interview to Coverage Opinions addressing a claims career like none other.

Coverage Opinions: Thank you Insurance Grinch for taking the time to discuss your 30+ year career handling Santa’s claims. Were the other adjusters jealous that you handled such a fascinating and unique account?

Insurance Grinch: Very much so. But not because I was handling Santa’s claims. Because it meant that I didn’t have to deal with any construction defect claims.

CO: What was your favorite thing about handling Santa’s claims?

IG: When you put on your Match.com profile for “occupation” that you handle Santa Claus’s insurance claims it makes a lot of people want to meet you.

CO: What was the most common claim from Santa that you handled?

IG: That’s easy. A kid would ask Santa for something – like an iPad. And he’d wake up on Christmas morning and find a sweater. Then, just as day follows night, in rolled the claim against Santa for breach of contract and detrimental reliance.

CO: How did you handle these?

IG: Well, there was no “bodily injury,” “property damage” or “personal and advertising injury” to trigger CGL coverage. And several years ago the North Pole Supreme Court held that, when Santa opens a letter from a youngster, it qualified as the formation of a contract. I know. It’s crazy, right. But it’s a liberal bench up here. But once the court found that an opened letter was a contract, it became easy to disclaim coverage since the professional liability policy has a breach of contract exclusion.

CO: Tell me about that claim where Blitzen bit off a kid’s finger?

IG: The kid was visiting Santa on a school trip and handing Blitzen a carrot. Except the kid was holding it in front of Blitzen’s mouth and the pulling it away. Holding it in front of his mouth and the pulling it away. The kid deserved it. I’m pretty sure Blitzen did it on purpose. At least I hope he did.

CO: Was it covered?

IG: No. We had a reindeer exclusion in all of the policies. I know. It seems strange given that the reindeer are such an essential part of Santa’s operation. But Santa didn’t read the policy. At least not until it was too late. And the broker was asleep at the switch. So we were able to get it in. And we have refused to take it out. We’re the only insurer in the North Pole. So where else is Santa going to go.

CO: What was the most expensive claim that you handled?

IC: One year Santa was in someone’s living room and his toy sack knocked a vase off a table. Turns out it was from the Ming Dynasty. Worth two million. The homeowner’s insurer paid for it. We were sure a subro claim would be made. We kept waiting but it never came in. Word on the street was that the homeowner’s carrier was afraid of the bad press from suing Santa.

CO: Were there any unique liability issues involving Santa?

IG: Many years ago the North Pole Supreme Court held that Santa can be liable for a defective product under the Restatement of Torts 402(A). As you can imagine, this opened Santa up to massive products liability exposure – defective BB guns, Easy Bake Ovens that start a fire, Parcheesi pieces that get swallowed. He was never able to get products coverage after that.

CO: You don’t get too many visitors up here. Seems like Santa’s premises exposure was pretty minimal.

IG: True. Not many make their way here. No direct flights. But that didn’t stop Santa from having premises liability exposure. Santa never shoveled the snow. He blamed a bad back but I think he was just lazy. The mail man would come ten times a day during the busy season and constantly wipe out on ice while walking up Santa’s driveway. Santa knew it was going to happen. Finally we said enough is enough and disclaimed coverage based on no “occurrence.”

CO: Were there are claims that involve Coverage B of the CGL policy?

IG: One in particular. Santa would put a kid on the naughty list. The brat would turn around and sue for defamation. But we were successful in knocking these out of coverage on the basis that there was no “publication” of the kid’s naughty status. The only one who knew was the kid himself when he received the mandatory ten-day notice letter from Santa.

CO: What about the elves. Did they ever cause any trouble for Santa?

IG: Look, this was a big operation. At peak time the elves work 16 hour days. What choice did Santa have? Work the elves to death or disappoint a kid in Cedar Rapids who wanted a fire truck. So of course there were some wage and hour and overtime disputes. But we had an exclusion for this. The elves also got hurt fairly regularly. All the uncovered lawsuits required Santa to cut some corners on safety. Thankfully we didn’t write the comp.

IG: All the time. But that was an easy one to handle. Those claims fit right into the exclusion for property damage to that particular part of real property on which you are performing operations.

CO: Any other interesting things about Santa’s risk program?

IG: We require Santa to be an additional insured on all of the mall Santa’s policies. Not surprisingly, Santa sometimes gets brought into a suit against a mall Santa who did something stupid. But Santa didn’t police their policies so he was never an additional insured. And we had an exclusion for Santa’s failure to secure AI rights.

CO: I’m starting to wonder – were any claims covered?

IG: Of course. Back in ’98 we paid a claim. Wait. It might have been ’97. A tike fell off Santa’s lap. We looked at everything but just couldn’t find a reason to disclaim. We thought about no “occurrence” since it seemed like faulty work. The kid is supposed to stay on Santa’s lap. He fell off. That sure sounded faulty to me. But in the end we settled and wrote a check. The policy had a pretty low sub-limit for claims arising out of, based on, in connection with or related to kids falling off Santa’s lap.

CO: Have you been training your successor?

IG: I have. But he still has a long way to go. On my last day in the office he got in a claim from a germaphobe family saying that Santa sneezed on their son. The kid is seeking medical monitoring for the rest of his life. The new adjuster was ready to appoint counsel. I said not so fast. Sounds like the pollution exclusion.

CO: What advice did you give to your successor?

IG: I explained to him that the vast majority of the claims come in the door in January and February. If he’s doing his job he’ll have them all disclaimed by the end of March. After that the key is to pretend to be busy for the next nine months.

Tis the Season For Insurance Coverage

Reindeer And Coverage Litigation

My wife bought our dog a Christmas present. I said what are you doing? You’re crazy. And then I covered the dogs ears before letting her tell me what she got him.

Just as I discussed in the last issue of CO, while you would think that Thanksgiving is one of a handful a days a year when insurance coverage can take a break, it’s not. There are no turkey-induced naps to be had on the fourth Thursday in November. Certainly the folks in Jenkins v. Mayflower Insurance Exchange (Ariz. 1963), State Insurance Fund v. David A. Gobble (Ok. 1988) and Hodgate v. Pilgrim Insurance Company (Conn. Super. Ct. 2013) know this.

It turns out that Christmas is just the same. Here too insurance coverage cannot be cast aside for the annual NBA marathon and a crudite platter with your cousins. Even on the one day a year when nothing is open except the Rite-Aid near my house, insurance coverage gets no rest. Consider the amount of coverage litigation over the years involving Christmas and its many symbols. [These are real. Sometimes I make stuff up in CO. This isn’t one of them.]

Belated Black Friday Door Buster:50% Off General Liability Insurance Coverage – Key Issues in Every State

Key Issues 3rd Edition ForHalf Price! Biggest Discount Ever!

Thank you to everyone who made the 3rd edition of General Liability Insurance Coverage – Key Issues in Every State such a huge success this year. Even nine months after its release sales remain brisk.

It’s that time of the year when prices get slashed – and the 3rd edition of Key Issues is no exception. A 50% discount – whoa, that’s half price – is being offered! Normally it requires a purchase of tons of copies to get the book at this price. Now save 50% on just one measly copy.

So if you have not yet purchased the 3rd Edition of Key Issues your procrastination has paid off! If someone you know has it on their gift list you can be a sport and save lots of money. This deep discount also makes it easy to buy a second copy -- since 27 people sharing one book is no doubt a hassle. Or why not get a holiday gift for that person who provides you with so much help in your coverage cases.

Amazon is providing NO discount. They are selling it at full list price. But I don’t want to see CO readers pay anything close to that.

See for yourself why so many find it useful to have, at their fingertips, a nearly 800-page book with just one single objective -- Providing the rule of law, clearly and in detail, in every state (and D.C.), on the liability coverage issues that matter most.

Thank you to everyone who tuned in on November 18th for the webinar: “The Definitive Reservation Of Rights Checklist: 50 Things That Every ROR Needs” – a collaboration between Coverage Opinions, National Underwriter and American Lawyer Media. The attendance was overwhelming. Some organizations had dozens of attendees.

And thank you for all of the comments that so many of you sent saying nice things about webinar. The theme of the comments was that the program was extremely practical, with many attendees telling me that they took pages of notes and began to makes changes to their ROR letters immediately after the webinar was over. That was my number one objective – to put on a webinar where people actually learned something and that could be implemented five minutes after the program concluded.

Did you miss the 50 Item ROR webinar? If so do not pout. I’m tellin’ you why. The webinar is archived.

Coming soon: More practical webinar collaborations between Coverage Opinions, National Underwriter and American Lawyer Media. I’ll let you know.

Vol. 4, Iss. 12
December 16, 2015

Welcome to the 15th annual look back at the year’s ten most significant insurance coverage decisions. Wow! Fifteen years! That’s the crystal anniversary – in case you were thinking of sending me a gift.

In any given year there are numerous coverage decisions of significance. That’s just the law of large numbers. Some years it seems like insurers win more of the big ones. Some years it seems like it is the policyholders. But this year there was no sense that one side clobbered the other. Some years there is one coverage decision that stands out as, far and away, the king of the mountain. This year no case hogged the spotlight. Some years it is difficult to select ten coverage cases as the most significant – because there are too many candidates or not enough. This year the porridge was just right.

While no one case stole the show in 2015, there was a coverage issue that made a lot of noise: bad faith failure to settle. [I guess you could argue that, in some cases, it is not a coverage issue – but, rather, a liability issue. However, I would dispute that.] In any event, numerous decisions this year addressed bad faith failure to settle – but not just in the routine scenario, to wit, an insurer rejects a settlement demand within limits, the case goes to trial, there is an excess verdict and the issue before the court is whether the insurer’s decision to proceed to trial was made in bad faith, based on the state’s particular standard for such determination. In any year you can expect to see cases involving this “paradigm” bad faith failure to settle situation. But this year there were several decisions addressing unique aspects of the issue. Four of these bad faith failure to settle cases – one more like a cousin – are included as part of the ten most significant of the year. And a fifth one is in the same family.

As I always do at the outset of the annual Top 10 Cases of the Year, here is my description of the selection process (repeated from past years’ editions). The process is highly subjective, not in the least bit scientific, and is in no way democratic. But just because the selection process has no accountability or checks and balances whatsoever does not mean that it wants for deliberativeness. To the contrary, the process is very deliberate and involves a lot of analysis, balancing, hand-wringing and tossing and turning at night. It’s just that only one person is doing any of this.

[If you think I missed a case, tell me. I’ll be the first to admit that I goofed. I did so last year when I took myself to task for excluding the New York high court’s decision in K2-II, despite even providing an explanation why I initially excluded it.]

The selection process operates throughout the year to identify coverage decisions (usually, but not always, from state high courts) that (i) involve a frequently occurring claim scenario that has not been the subject of many, or clear-cut, decisions; (ii) alter a previously held view on an issue; (iii) are part of a new trend; (iv) involve a burgeoning or novel issue; or (v) provide a novel policy interpretation. Some of these criteria overlap. Admittedly, there is also an element of “I know one when I see one” in the process.

In general, the most important consideration for selecting a case as one of the year’s ten most significant is its potential ability to influence other courts nationally. Many courts in coverage cases have no qualms about seeking guidance from case law outside their borders. In fact, it is routine--especially so when in-state guidance is lacking. The selection criteria operates to identify the ten cases most likely to be looked at by courts on a national scale and influence their decisions.

That being said, the most common reason why many unquestionably important decisions are not selected is because other states do not need guidance on the particular issue, or the decision is tied to something unique about the particular state. Therefore, a decision that may be hugely important for its own state – indeed, it may even be the most important decision of the year for that state – nonetheless will be passed over as one of the year’s ten most significant if it has little chance of being called upon by other states at a later time.

For example, this year the Nevada Supreme Court held in State Farm v. Hansen, No. 64484 (Nev. Sept. 24, 2015) that “Nevada law requires an insurer to provide independent counsel for its insured when a conflict of interest arises between the insurer and the insured. . . . We further conclude that an insurer is only obligated to provide independent counsel when the insured’s and the insurer’s legal interests actually conflict. A reservation of rights letter does not create a per se conflict of interest.” While the significance of Hansen for lawyers practicing in Lost Wages cannot be overstated, the decision was not considered for inclusion on the annual Top 10 Best in Show. There is simply no shortage of case law nationally addressing the independent counsel issue. In addition, the majority of courts have said the same thing as Hansen -- an insured is entitled to independent counsel IF the insured’s and the insurer’s legal interests actually conflict. So Hansen also failed to produce anything novel about the issue.

Lastly, I am not unmindful that this year’s Top 10 list includes four cases involving Pennsylvania law. I work in Pennsylvania. This is not some sort of insurance coverage jingoism in play. This is just how it worked out. Believe me. The last fourteen years of this list establishes that there is no Pennsylvania home-cooking here.

Best wishes for a healthy and prosperous 2016 and may any resolutions that you make last at least until February.

The year’s ten most significant insurance coverage decisions are listed in the order that they were decided.

Court Allows Insurer To Settle And Then Seek Recovery Of Uncovered Damages

I know. It seems curious that an unpublished decision, from a federal District Court, could be one of the year’s ten most significant coverage cases. But when a court provides a solution to one of the toughest issues of them all for insurers, not to mention one sorely lacking in guidance, it is worthy of a lot of attention.

The insurer is defending its insured under a reservation of rights. There are strong coverage defenses. The underlying case is getting close to trial. There is a demand to settle within limits. It is a settlement that should be accepted based on liability and damages considerations. But the insurer does not believe that coverage is owed. So it is not pleased at the prospect of settling. But if it accepts the demand, it could lose its coverage defenses. If it does not accept the demand, because of the coverage defenses, it may be liable for the verdict – excess or otherwise. And, of course, a declaratory judgment is unlikely to solve the problem as trial is probably approaching and a DJ could never be resolved in time.

An issue along these lines played out not long ago in the Eastern District of Pennsylvania in American Western Home Insurance Co. v. Donnelly Distribution, Inc. The case is not the exact scenario that I described -- but it certainly provides real guidance to an insurer confronting it.

Donnelly Distribution was named as a defendant in a slip and fall action. The plaintiff alleged that her foot became entangled in the loop of a plastic tie used to wrap papers allegedly distributed or used by Donnelly. Donnelly was defended by its insurer, American Western Home Ins. Co., under a reservation of rights. For whatever reason, American Western did not believe that it owed coverage, for defense or indemnity, and filed a declaratory judgment action.

The District Court in the declaratory judgment action ruled that Donnelly was entitled to defense and indemnity. Shortly before trial the action was settled for $150,000. American Western was to pay $125,000 toward the settlement. American Western appealed the decision in the declaratory judgment action and the Third Circuit reversed -- ruling that American Western was not obligated to defend or indemnify Donnelly. American Western then filed an action seeking reimbursement of the $125,000 that it paid to settle the personal injury suit.

The court in the reimbursement action held that American Western was entitled to the recovery of the amount paid. The court did not announce any general rule governing an insurer’s right to reimbursement of a settlement following a judicial determination that no coverage was owed for it. And the court acknowledged that the procedural posture of the underlying case “is an important piece of the right-to-reimbursement analysis.” However, how the court reached its decision, permitting reimbursement, provides some lessons, and possible assistance, for an insurer that is confronted with a settlement demand for a claim that it does not believe is covered.

First, the court’s decision makes clear that the insurer will be in the best posture to seek reimbursement, of an uncovered claim, if it filed a declaratory judgment action seeking a determination of the lack of coverage. The filing of such declaratory judgment action is also likely to be more effective if it was filed as far in advance of the trial as possible. But, admittedly, even when that is done, there may still not be a ruling on coverage in time to guide the insurer’s response to the settlement demand. This is where American Western v. Donnelly comes in.

American Western argued that it was entitled to reimbursement of the settlement on an unjust enrichment theory. The insurer acknowledged that its policy contained no right of reimbursement and that it was not proceeding on a contract theory. The court’s reasons for allowing reimbursement of the settlement were several and tied to certain Pennsylvania case law. But the take-aways are as follows.

While Pennsylvania courts have endorsed the general doctrine, prohibiting recovery for voluntary payments made due to a mistake of law, this was a different kind of “mistake in law” situation: “American Western did not make the payment under a mistake of law. American Western has consistently disputed its obligation to pay under the insurance policy through a reservation of rights letter and a letter disclaiming coverage. Additionally, American Western clearly communicated to Donnelly its dispute over its obligation[.]”

Second, the court observed that “[w]hile the settlement payment certainly benefitted American Western, the Court concludes that it greatly benefitted Donnelly as well. This case was settled well within policy limits. Thus, the Court thinks it unlikely that Donnelly faced a situation in which it would be hit with an excess verdict. However, the settlement guaranteed a fixed settlement amount and capped costs, whereas a trial could have led to a verdict greater than the settlement in a case in which it was ultimately decided that American Western owed no duty to indemnify Donnelly.”

Lastly, the court noted a practical aspect of its decision to allow reimbursement. The Third Circuit was aware that a settlement had been reached in the personal injury action when it issued its decision that no coverage was owed. Based on this, the court observed: “It therefore seems unlikely that American Western would have no duty to indemnify but would be barred from receiving reimbursement once its duties and obligations were litigated in this forum. If such a distinction existed, it would provide an incentive for the insurer to not settle, hoping that it owed no duty to indemnify, or stall on litigating and paying a settlement, hoping that its duties would be clarified before it made any payments. This Court does not wish to encourage either of those responses.”

Based on these rationales, an insurer that is undertaking its insured’s defense, under a reservation of rights, and has filed a coverage action, but that is not resolved before a demand to settle is made, has an argument that any settlement it makes is one for which it is entitled to reimbursement, following any judicial determination that no coverage was owed for such settlement. [Of course, the insured’s financial ability to actually reimburse the settlement payment is a key practical issue.]

Having filed the declaratory judgment action, it cannot be said that the insurer’s settlement payment was voluntarily made due to a mistake of law. To the contrary, in fact. Filing the coverage action evidences the insurer’s clear belief that no coverage is owed. Second, the settlement benefits the insured. Since coverage may not be owed, the settlement prevents a verdict greater than the settlement amount, for which the insured may have no coverage, as was the case in Donnelly.

Donnelly makes an important point. By filing a declaratory judgment action, even if it is not resolved in time before a settlement demand is made, an insurer has more options when an underlying action gets down to the wire and it faces two choices – both difficult: settle and possibly lose coverage defenses or not settle and face liability for the verdict – excess of the settlement amount or policy limits. American West filed a coverage action and thereafter had an option after being confronted with the settlement demand.

Court Turns CGL Policy Into One For Product Copyright Infringement
By Joshua Mooney

Joshua Mooney is a Partner at White and Williams, LLP and Co-Chair of the firm’s Cyber Group. Josh’s practice focuses on insurance law in connection with privacy rights, advertising injury, cyber and data security liability, and media/entertainment liability. He also writes The Coverage Inkwell, a blog on IP, privacy, and cyber liability coverage issues.

In Mid-Continental Cas. Co. v. Kipp Flores Architects, LLC, the United States Court of Appeals for the Fifth Circuit held that a house is an “advertisement” for purposes of the duty to indemnify under Coverage B. The decision turned a CGL policy into insurance for product copyright infringement, and its logic can lead to a parade of the horribles. For this reason, Kipp Flores is worthy of Coverage Opinions’s Top Ten.

The background facts for the case are straightforward and unremarkable. Plaintiffs, Kipp Flores Architects (“KFA”), was an architecture firm that designed homes and licensed its designs to builders. The insured, Hallmark Design Homes (“Hallmark”), built a large number of homes using KFA’s designs, but without a license. KFA sued Hallmark for copyright infringement, seeking damages under the Copyright Act. KFA alleged that: “Defendants have created, published and used non-pictorial depictions of structures based on KFA’s Copyrighted Works in promotional and advertising materials. Defendants have published and used these infringing materials in the course of advertising their infringing structures. Furthermore, defendants have used the structures themselves to advertise their infringing structures.”

Hallmark had a series of CGL policies covering damages “because of” “personal and advertising injury,” defined in part as injuring arising out of the “infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’” The policies defined “advertisement” in part as “a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.” The policies had an exclusion for Infringement Of Copyright, Patent, Trademark Or Trade Secret which prohibited coverage for: “‘Personal and advertising injury’ arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property rights. However, this exclusion does not apply to infringement, in your ‘advertisement’, of copyright, trade dress or slogan.”

The underlying action went to trial, and the jury returned a verdict in KFA’s favor for $3.3 million. Coverage litigation ensued to determine the insurer’s duty to indemnify the insured for the verdict, and the parties cross-moved for summary judgment.

The insurer argued that there was no duty to indemnify because the alleged copyright infringement in the home designs took place in the homes themselves, and not in an “advertisement,” as defined in the policies. The insurer also argued that the damages entered against Hallmark were for the homes’ infringement, and not “because of” copyright infringement in advertisements themselves to satisfy the meaning of “personal and advertising injury.” Finally, the insurer argued that the IP exclusion applied. Strong arguments. However, the trial court denied the insurer’s motion and granted KFA’s cross-motion for coverage. The Fifth Circuit affirmed.

On appeal, the insurer argued that it had no duty to indemnify because the homes themselves could not constitute an “advertisement,” and that the $3.3 million verdict was not damages “because of” an advertising injury to implicate coverage. The Fifth Circuit disagreed. Noting that the insurer itself “conceded that KFA presented evidence that the houses themselves were Hallmark’s primary form of marketing,” the Court concluded that the houses constituted “notice that is broadcast or published to the general public” to fall within the policies’ definition for “advertisement.”

Stating that the policies did not define “notice” or “published,” the Court reasoned that a house could be an advertisement the terms were understood to have very broad meanings: “It is important to note that the policies never specify that “notice” must take any particular form (e.g., a writing or a website) and never exclude from the definition a physical object, nor do they define “broadcast” or “published.” Among other things, the Oxford English Dictionary defines “notice” sweepingly as the “act of imparting information” or “something which imparts information.” The few cases interpreting the policy language at issue here (“a notice that is broadcast or published”) have construed “notice” very broadly. Under the policy language, such notice need only be broadcast or published to qualify as an advertisement. While “broadcast” generally implies radio or television advertisement, “publish” is much more comprehensively defined as “to make public or generally known” or “to make generally accessible or available for acceptance or use (a work of art, information, etc.); to present to or before the public.” [Emphasis added.]

In other words, because the terms “notice” and “broadcast” were not restricted to forms of communication, such as oral or written, or electronic, and because they did not exclude a house in a written definition, the terms could mean a house.

Because the insured insisted that the homes were the “primary marketing device” to sell the homes, and because the copyright infringement was in the homes themselves, the Court concluded that the underlying action alleged infringement of copyright in the insured’s advertisement: “In this case, it is undisputed that Hallmark’s primary means of marketing its construction business was through the use of the homes themselves, both through model homes and yard signs on the property of infringing homes it had built, all of which were marketed to the general public. Mid–Continent even contends there is no evidence that Hallmark’s customers saw any marketing materials other than the houses themselves. Under the undisputed facts, Hallmark’s use of the infringing houses satisfies not only the policies’ expansive definition of “advertisement” and Texas law’s similarly broad construction of the term but also common sense. We therefore conclude that the infringing houses in this case, as used by Hallmark, all qualify as “advertisements” under the policies.” [Emphasis added.]

Wait. What? This brings a whole new meaning to an old real estate agent motto that “a good house just sells itself.”

The Fifth Circuit summarily dispatched the insurer’s remaining arguments. Because the homes constituted an “advertisement,” the Court reasoned that the underlying verdict was for damages “because of” “personal and advertising injury” to satisfy the policies’ insuring agreements. In addition, the Court held that the IP Exclusion’s carve-out exception for “infringement, in your ‘advertisement’. . . of copyright” applied, thereby making the exclusion inapplicable.

To support its decision, the Court emphasized concessions made by the insurer, however, all the concessions in the world should not have converted a house into an advertisement. This decision potentially is a dramatic shift in judicial construction of insurance coverage for copyright infringement in advertising injury. Traditionally, courts recognized that advertising injury coverage only covered copyright infringement in the advertisement, not in the product itself. Here, Kipp Flores eradiated that important distinction. Because the homes in question were deemed to be the best means to market the builder’s work, the homes – the infringing products themselves – were converted into advertisements for purposes of insurance coverage. By logical extension, an insured need only contend that an infringing product sells itself in order to qualify for “personal and advertising injury” coverage. The Court called this “common sense.” Yet, using a product to sell itself is not uncommon. It’s the primary tool of designer-ware and brand names. It’s the primary tool for counterfeit and grey-market products. Coverage for infringement in the products themselves was never the risk Coverage B was to insure. Kipp Flores may put a change to that.

I have never been one of those people who believes that, anytime an insurer is told by a court that it must provide coverage, that it didn’t believe was owed, the insurer needs to amend its policy language. That is simply not feasible or sensible. There are myriad reasons why an insurer may lose a case. And one lose on an issue, or even a few, may not be a reflection of the policy’s ability, in the grand scheme, to do its intended job.

But sometimes a decision comes along, especially from a state high court, involving an important policy provision, that is interpreted so far afield from its intent, and with reasoning that other courts may find easy to adopt, that insurers need to take a hard look at whether a change is in order. The Hawaii Supreme Court’s decision in C. Brewer and Co., Ltd. v. Marine Indemnity Ins. Co., addressing the interpretation of a Designated Premises Endorsement, is in the return-to-the-drawing-board category. There is more to the decision than I’ll discuss here. But the following will make the point.

In March 2006, a large portion of the Kaloko Dam in Hawaii collapsed, releasing over three million gallons of water. It caused the loss of seven lives and extensive property damage. At the time of the dam breach, James Pflueger owned the dam. Pflueger filed suit seeking damages and indemnification from C. Brewer and Company, Ltd. According to the Pflueger complaint, C. Brewer sold him the dam, allegedly aware of the dam’s questionable structural stability. C. Brewer then filed a complaint, against seventeen insurance companies, seeking various rulings on coverage.

Particularly at issue here was coverage under a James River Insurance Company CGL policy, in effect at the time of the dam breach. Putting aside certain lower court rulings, the issue before the Supreme Court was the applicability of a Designated Premises Endorsement. Specifically, James River argued that the policy’s DPE limited coverage to liability “arising out of the ownership, maintenance, and use of the [designated] premises.” And, most importantly, the dam site was not listed as a designated premises.

It seems pretty clear, right? And I have no doubt that James River thought so too. But C. Brewer didn’t. And neither did the court. In fact, the court also saw the issue as a pretty clear one. The court agreed with C. Brewer that the “policy provides coverage for injury and damage arising out of its ‘use’ of its corporate headquarters to make negligent corporate decisions [the HQ was a designated premise] even though the resulting damage happened at the unlisted Dam site.” I know. It’s breathtaking.

The court’s decision was tied to its conclusion that “arising out of” is “ordinarily understood to mean ‘originating from,’ ‘having its origin in,’ ‘growing out of,’ or ‘flowing from.’ In the insurance context, this phrase is often interpreted to require a causal connection between the injuries alleged and the objects made subject to the phrase.”

The court also supported its decision in this way: “James River seeks to rewrite the term ‘arising out of’ to limit liability to injury and damage occurring on designated premises. Such a construction of the DPE would effectively convert the James River policy from a CGL policy to a premises liability policy that limits coverage to certain premises. James River’s argument contradicts the policy, which specifically states that it is a ‘commercial general liability’ policy.” (emphasis in original).

The court had more reasons for its decision. The policy’s inclusion of “personal and advertising injury” in the DPE means that “decisions made at C. Brewer’s corporate headquarters would likely be the cause of any advertising injury; however, the resulting injury would not occur on designated premises.” Lastly, “the James River policy’s broad coverage territory similarly encompasses the United States, Canada, Puerto Rico, and, under certain circumstances, other parts of the world.”

Even if there are aspects of the policy or facts at issue here that are unique – no two cases are ever exactly alike; and here the facts and policy language weren’t so unique – C. Brewer is a significant decision for insurers that seek to limit their CGL coverage to liability ON designated premises. That is certainly what James River thought it was selling to C. Brewer. The idea that its policy provided coverage, for injury and damage arising out of its insured’s “use” of its corporate headquarters (a designated premise) to make negligent corporate decisions that resulted in damage happening at a non-designated premise, was surely not the intent of the DPW. Not even close. Given that it is not difficult to see other courts finding this argument attractive, Aloha insurers if you use DPEs.

Overlook This Simple Aspect Of A Reservation Of Rights Letter And Poof It’s Gone

You’ve just written the greatest reservation of rights letter in history and dropped it in the mail. But there’s one problem - it didn’t address coverage for all of the insureds that are defendants in the action. For example, consider a complaint that names several insureds as defendants, such as a named insured company and several of its employees. Here an insurer could overlook the employee-insureds, and send a reservation of rights letter to only the named insured company, and limit the discussion of coverage to the named insured.

The Pennsylvania Superior Court’s decision in Erie Insurance Exchange v. Lobenthal demonstrates this situation and the result for the insurer was harsh. A letter that was a reservation of rights letter is now not a reservation of rights letter.

Lobenthal involved coverage for a motor vehicle accident. I’m going to skip some of the details and focus on the overarching lesson from the case. Kory Boyd suffered injuries in a motor vehicle accident while a passenger in a car driven by Devin Miller. An underlying complaint alleged, among other things, that Michaela Lobenthal engaged in “negligent, careless, reckless, outrageous, willful and wanton conduct” and concerted tortuous conduct in that she permitted the possession and consumption of controlled substances by Defendant Miller at a property owned by Defendant Lobenthal’s parents which was covered by [the Erie] insurance policy.”

Putting aside some details, Erie defended Michaela Lobenthal -- being an insured as a resident of her parents’ household. But there was a coverage issue – the potential applicability of a “controlled substances” exclusion. Despite Erie sending two reservation of rights letters, the issue before the Pennsylvania appeals court was whether Michaela Lobenthal was being defended under a reservation of rights.

Here is how that issue could be: “In the instant case, Erie sent two reservation of rights letters, one on April 28, 2011, prior to the underlying complaint being filed, and another on February 7, 2012. Both letters were addressed only to the named insureds, Michaela’s parents, Adam and Jacqueline Lobenthal; neither letter mentioned the defendant in the underlying tort action, Michaela Lobenthal, who had attained majority status as of November 20, 2010. These letters reserved Erie’s right to disclaim coverage and liability for any judgment ‘that may be rendered against yourself,’ i.e., against Adam and Jacqueline Lobenthal. Furthermore, only the second reservation of rights letter, sent approximately three and one-half months after the preliminary objections were decided, referenced the controlled substances exclusion in the policy.” [Preliminary objections resulted in the covered claims, providing alcohol, being dismissed.]

The opinion notes that Michaela’s parents were voluntarily dismissed from the underlying action in June 2011, i.e., they were not defendants when the second reservation of rights letter – at the time that the case was in suit -- was sent.

The court had little trouble concluding that, despite the February 7, 2012 reservation of rights letter being addressed to the named insureds, Michaela’s parents, as well as being sent to her defense counsel, Michaela was not being defended under a reservation of rights.

The court’s decision was as follows: “Erie’s reservation of rights letter was addressed solely to the named insureds, Adam and Jacqueline Lobenthal, not to Michaela. The letter made no mention of Michaela. As in [citation omitted], we will not impute notice to Michaela based on the fact the letter was sent to counsel where the letter was addressed to her parents and made no reference whatsoever to Michaela. By the same token, we refuse to attribute notice to Michaela based on the fact that she was living with her parents at the time. Michaela was an adult at the time the lawsuit was filed, and there is no evidence that she actually read the letter. Michaela was the defendant in the underlying tort action, and the letter should have been addressed in her name.”

Thus, despite that Erie should have owed no coverage to Michaela, on account of the controlled substances exclusion – the court made that point clear – such was not to be the case, as no reservation of rights letter was ever sent to her.

There is much that can be said about this opinion.

Since Michaela’s parents were not defendants when the second reservation of rights letter was sent, a letter addressed to them, stating that Erie was reserving its right to disclaim coverage and liability for any judgment “that may be rendered against yourself,” i.e., against Adam and Jacqueline Lobenthal, certainly lacked precision.

But the overarching take-away from Lobenthal is that, when an insurer sends a reservation of rights letter, no matter how well-drafted it is, it must address coverage for all insureds and be sent to or on behalf of them. There are opportunities for this to be missed. If so, a lot of effort that is put into a reservation of rights letter may be for naught if some insureds are overlooked.

Vol. 4, Iss. 12
December 16, 2015

Kelly v. State Farm Fire & Casualty Co. 169 So. 3d 328 (La. 2015)

Insurer Can Be Liable For Bad Faith Failure To Settle With No Demand Within Limits

It is unquestionably one of the most challenging issues to confront an insurer – the demand to settle a claim within the insured’s limits of liability. We all know the drill. An insurer has been defending its insured for a while. The case is coming down to the end and trial is on the horizon. The insurer is at the point where it knows as much about the liability and damages issues as it ever will. And with that information, the possibility of a verdict in excess of the limits of liability is known to be a real one. A demand to settle within the insured’s limit of liability, thereby relieving the insured of the risk of personal liability, is made by the plaintiff. All things considered, the applicable state standard, for whether the insurer should accept the limits demand, has been met. In other words, not accepting the demand will saddle the insurer with liability for an excess verdict. [Of course, when there are also coverage issues, the degree of difficulty here goes from a double lutz to a triple axel. But that’s not the issue today.]

But there is another version of this story. Change one fact -- a demand to settle within the insured’s limit of liability is never made. In this situation, insurers generally see themselves as relieved of any risk of exposure for an excess verdict. After all, even if the insured has a legitimate risk of personal liability for a verdict above its policy limit, the insurer’s hands are tied. Right? Without a demand to settle within the insured’s limit of liability, what’s it to do? No matter how much it makes sense to settle the case, the opportunity to do so just isn’t there.

This is the fundamental issue at the core of the Louisiana Supreme Court’s decision in Kelly v. State Farm Fire & Casualty Co. Kelly involves an automobile accident, a low limits auto policy and an excess verdict. But the particular facts of Kelly are not necessary to address the issues and overarching lessons from the case. So I’ll skip all that and get right to big picture. The Louisiana Supreme Court, at the request of the Fifth Circuit, had this question before it: Can an insurer be found liable for a bad-faith failure-to-settle claim, i.e., an excess verdict, when the insurer never received a firm settlement offer?

To be more specific, the issue was whether an insurer’s liability, for such excess verdict, could be based on its obligations under La. R.S. Section 22:1973(A), which provides as follows:” An insurer, including but not limited to a foreign line and surplus line insurer, owes to his insured a duty of good faith and fair dealing. The insurer has an affirmative duty to adjust claims fairly and promptly and to make a reasonable effort to settle claims with the insured or the claimant, or both. Any insurer who breaches these duties shall be liable for any damages sustained as a result of the breach.”

The court’s first task was to determine whether an insured possesses a cause of action, under La. R.S. Section 22:1973(A), for bad faith failure to settle. The court held that it did. Among other reasons, the Louisiana high court pointed to the “long lineage” of the state’s case law that has provided insureds with a cause of action to recover a judgment in excess of policy limits. The court referred to Section 22:1973(A) as the legislature’s “essential[] codification” of the “jurisprudentially-recognized cause of action in favor of insureds for an insurer’s bad faith failure to settle.”

The court put its conclusion, that an insured possesses a cause of action, under La. R.S. Section 22:1973(A) for bad faith failure to settle, this way: “[I]t is presumed the Legislature enacts each statute with deliberation and with full knowledge of all existing laws on the same subject. It therefore stands to reason that the legislature did not intend its remedial measures to take away any rights, but to add rights.”

Having determined that Section 22:1973(A) supports a cause of action for bad faith failure to settle, the court turned to the next question: must an insurer receive “a firm settlement offer” as a condition for an insured to recover for the insurer’s bad-faith failure-to-settle?

The court answered this question in the negative. First, the court was persuaded by the statute’s use of the phrase “affirmative duty,” which it noted means “to take positive action(s) to comply with a legal standard.” Then, the court noted that two positive steps listed in the statute, to meet this duty, are: “adjust claims fairly and promptly” and “make a reasonable effort to settle claims with the insured or the claimant, or both.”

Following these observations, the court explained its conclusion, that an insurer need not receive “a firm settlement offer,” as a condition for an insured to recover for the insurer’s bad-faith failure-to-settle, as follows (lengthy quote follows (citations omitted), but it’s worth setting out the court’s explanation in full):

“The clearest indicator is that a firm settlement offer is not listed anywhere in the statute. To impose the requirement of a firm settlement offer would essentially amount to adding words not included in the statute. As we understand State Farm’s brief, not only would we have to essentially add wording requiring a ‘firm’ or ‘actual’ offer to settle, but State Farm would have us further qualify that an offer must be ‘within the available policy limits.’ The wording proposed by State Farm amounts not to statutory interpretation, but to a wholesale rewriting of La. R.S. 22:1973(A). Such rewriting is not, however, the role of this or other Louisiana courts.

Practical considerations also support our interpretation of La. R.S. 22:1973(A) as not requiring a firm offer as a condition for finding the insurer has acted in bad faith. The insured has no control over whether a firm offer will be submitted. For that matter, neither does the insurer. Yet, the insurer has undertaken the obligation to protect the insured. [I]n every case, the insurance company is held to a high fiduciary duty to discharge its policy obligations to its insured in good faith-including the duty to defend the insured against covered claims and to consider the interests of the insured in every settlement. Therefore, we see no practical reason why the insurer’s obligation to act in good faith should be made subject to the tenuous possibility that an insurer will receive a firm settlement offer. Instead, the insurer’s obligation to act in good faith is triggered by knowledge of the particular situation, which knowledge [t]he insurer has an affirmative duty to gather during the claims process. See La. R.S. 22:1973(A). See also Smith, 95–2057 at 9–10, 679 So.2d at 377 (finding that an insurer has a duty to conduct ‘a thorough investigation’ and to consider ‘the evidence developed in the investigation’ when determining whether to litigate or settle).”

Held: “[A]n insurer can be found liable for a bad-faith failure-to-settle claim under La. R.S. 22:1973(A), notwithstanding that the insurer never received a firm settlement offer.”

There is much that can be said about Kelly v. State Farm.

On one hand, it is a Louisiana case interpreting a Louisiana statute. And Louisiana’s jurisprudence holds statutes in high regard (you know that whole French influence thing that they have going on down there). So the case can be dismissed as having no applicability beyond the Pelican State.

But here’s the rub. The statute at issue is part of Louisiana’s version of the National Association of Insurance Commissioner’s Unfair Claims Settlement Practices Act. And just about every state in the country has adopted some version of the NAIC’s Act. But the NAIC Act does not contain the “affirmative duty” language that was an important consideration in the Kelly court’s analysis. Rather, many states’ Unfair Claims Settlement Practices Acts instead likely provide that it is an unfair claims practice for an insurer to “not attempt[] in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear.” But could this provision be considered as having the same purpose of the Louisiana provision? And could the Kelly court’s reasoning (this is why I used that long quote) be persuasive, even if the statutory language is different?

Here’s what Kelly v. State Farm is all about. Is Kelly “Louisiana-enough” such that the decision does not have reach outside of Louisiana? Or has the Louisiana Supreme Court handed a playbook to policyholders and courts to change the bad faith landscape? Will insurers still be able to consider themselves without risk of exposure for an excess verdict because a demand to settle within the insured’s limit of liability was never made?

Punitive Damages Need Not Be Considered In Bad Faith Failure To Settle Equation

The Third Circuit’s decision in Wolfe v. Allstate Property & Casualty Company addresses a very interesting and important coverage issue and one where the existing law, nationally, is sparse. This is the confluence of factors that lands cases in the annual end of year Insurance-Palooza.

The decision in Wolfe addresses two important issues associated with a bad faith failure to settle claim. First, some background.

For ease (mine that is), I’ll provide the remaining background facts verbatim from the opinion:

“Wolfe made an initial settlement demand to Allstate of $25,000, based on medical records provided to Allstate’s adjuster. Allstate valued Wolfe's claim at $1,200 to $1,400, and Allstate responded with a counteroffer of $1,200. Wolfe rejected this offer, and neither party moved from those numbers. Wolfe then filed suit against Zierle. . . . During discovery, Wolfe learned of the extent of Zierle’s intoxication and amended the complaint to add a claim for punitive damages. Allstate wrote to Zierle about the potential for punitive damages and reminded him that those damages were not covered under his policy. Allstate advised Zierle that if a verdict was rendered against him on the punitive damages claim, Allstate would not pay that portion of the verdict, and he would be held responsible for it.

Prior to trial, Wolfe reiterated the $25,000 demand and emphasized that Allstate’s $1,200 offer was too low. Allstate stated that it would not increase its $1,200 offer (despite having authority to offer $1,400) unless Wolfe reduced his $25,000 demand. No further efforts at settlement were made by either party. The case went to trial, and the jury awarded Wolfe $15,000 in compensatory damages and $50,000 in punitive damages. Allstate paid the $15,000 compensatory damages award, but not the $50,000 punitive damages award. Following the trial, in return for Wolfe’s agreement not to enforce the punitive damages judgment against him personally, Zierle assigned his rights against Allstate to Wolfe.”

Wolfe, in Zierle’s shoes, sued Allstate in the Pennsylvania Court of Common Pleas, alleging, among other things, breach of contract and bad faith conduct under Pennsylvania’s bad faith statute.

So far this is nothing more than the general description of a typical bad faith failure to settle case. But here’s where it gets interesting. Under the breach of contract claim, Wolfe sought to recover the $50,000 in punitive damages awarded against Zierle. This gave rise to two issues before the Third Circuit Court of Appeals: (1) Could Wolfe introduce the punitive damages award from the underlying suit as evidence of his damages?; and (2) Did Allstate have a duty to factor in the potential for punitive damages when considering its obligation to settle within limits?

On the first question, the court held that Wolfe could not recover the punitive damages as part of his damages in a bad faith failure to settle case. The issue is not a pure form of the question whether punitive damages are insurable, but the answer was tied to that. The court noted “Pennsylvania’s longstanding rule that a claim for punitive damages against a tortfeasor who is personally guilty of outrageous and wanton misconduct is excluded from insurance coverage as a matter of law.” Thus, “[b]ecause Pennsylvania law prohibits insurers from providing coverage for punitive damages in order to ensure that tortfeasors are directly punished, we hold that Allstate cannot be responsible for punitive damages incurred in the underlying lawsuit. To hold otherwise would shift the burden of the punitive damages to the insurer, in clear contradiction of Pennsylvania public policy.”

The court also noted that California, Colorado and New York have similar prohibitions on the indemnification of punitive damages. “[T]hose states highest courts have similarly held that an insured cannot shift to the insurance company its responsibility for the punitive damages in a later case alleging a bad faith failure to settle by the insurer.”

In essence, the court is saying that if an insurer is not liable for punitive damages directly to its insured, then it is also not liable for them in an indirect manner.

While the court’s discussion of the second issue was very brief, it is, in my view, the more important of the two. Here’s the whole kit and kaboodle: “It follows from our reasoning that an insurer has no duty to consider the potential for the jury to return a verdict for punitive damages when it is negotiating a settlement of the case. To impose that duty would be tantamount to making the insurer responsible for those damages, which, as we have discussed, is against public policy. See Zieman Mfg. Co. v. St. Paul Fire & Marine Ins. Co., 724 F.2d 1343, 1346 (9th Cir.1983) (affirming the conclusion by the district court that ‘[t]he proposition that an insurer must settle, at any figure demanded within the policy limits, an action in which punitive damages are sought is nothing short of absurd. The practical effect of such a rule would be to pass on to the insurer the burden of punitive damages in clear violation of California statutes and public policy’); see also Wardrip v. Hart, 28 F.Supp.2d 1213, 1215–16 (D.Kan.1998) (same).”

Punitive damages are alleged much more frequently than they are actually awarded. That being so, the fact that punitive damages – in a state where they are fundamentally uninsurable -- are not an appropriate form of damages, in a bad faith failure to settle claim, is not likely to have a lot of applicability. Certainly some, yes, but not as much as the second issue.

When considering whether an insurer is obligated to settle a case, based on the possibility of a verdict in excess of limits, it may be the potential for the punitive damages that has a lot to do with pushing the case into that category – especially one that is relatively small or has fixed damages that do not exceed the policy limit. By taking away insurers’ obligation to consider punitive damages, when assessing whether a verdict can potentially exceed policy limits, the Wolfe court has given insurers justification for taking cases to trial, and then avoiding liability for a verdict in excess of limits, if that’s how it turns out.

As discussed above in Donnelly Distribution, there may be no harder issue than an insurer confronted with a settlement demand but which has defenses to coverage for any verdict against the insured. The Pennsylvania Supreme Court’s decision in The Babcock & Wilcox Company v. American Nuclear Insurers may find an important place in addressing this complex situation. This challenging issue is also sorely lacking in guidance. For that reason, B&W’s reach may extend beyond The Keystone State.

Since the Supreme Court used the opening paragraph of B&W to describe the issue, I’ll do the same. The court put it this way: “We granted review to consider an issue of first impression regarding whether an insured forfeits insurance coverage by settling a tort claim without the consent of its insurer [for $80 million], when the insurer defends the insured subject to a reservation of rights [to the tune of $40 million], asserting that the claims may not be covered by the policy.”

The court, just as succinctly and conveniently, provided the answer in the last paragraph: “In this case, after an extensive trial where the jury was presented with voluminous evidence relating to the strength of the underlying action and the settlement offer, the jury determined that the settlement was ‘fair and reasonable from the perspective of a reasonably prudent person in the same position of [Insureds] and in light of the totality of the circumstances,’ a standard which we adopt herein as the proper standard to apply in a reservation of rights case where an insured settles following the insurers' refusal to consent to settlement. We conclude that the Superior Court erred by requiring an insured to demonstrate bad faith when the insured accepts a settlement offer in a reservation of rights case.”

Barring something very unusual, it is a simple matter to figure out which party was the winner after reading a judicial opinion. On its face, that certainly applies to the B&W. After all, the court reinstated a multi-million dollar jury verdict in favor of B&W, concerning coverage for injuries and damages allegedly caused by emissions from its nuclear facilities.

But despite how easy it seems to identify the winner and loser in B&W, every so often judicial opinions can resemble a fun house mirror. This is one of those times. Yes ANI suffered a significant loss. But when the fat lady sings on B&W, it will go down as a case that provided significant benefits for insurers as a whole. B&W is a very complex and protracted case -- spanning two decades. Mercifully I can explain why I believe that insurers were the winners without any need to discuss its specifics.

The reason why B&W can be explained, without needing to discuss the case itself, is because the test that the Supreme Court adopted, for the handling of insurer-provided defenses under a reservation of rights, applies in ALL cases – even if they bear no resemblance to B&W. That is also at the heart of why the case is so significant – it has across the board applicability. Many coverage cases are important – but have the ability to be influential only in the context of certain limited factual or policy scenarios. B&W, however, will be a cloud that hangs over every Pennsylvania case being defended under a reservation of rights—regardless of the nature of the facts and coverage issues. To put it another way, B&W isn’t some pollution exclusion case that, while fascinating, has no relevance until the next time someone claims that their apartment smells like pastrami on account of the deli next door.

The story of B&W is that the Pennsylvania high court adopted a variation of the Arizona Supreme Court’s decision in United States Auto Ass’n. v. Morris, 741 P.2d 246 (Ariz. 1987). This nearly 30 year old decision was written by Justice Stanley Feldman (Ret.). The word Morris appears in the B&W opinion 41 times. You know what they say about imitation. So I reached out to Justice Feldman to ask him about the Pennsylvania Supreme Court’s flattery. His Honor -- now with the Arizona law firm of Haralson, Miller, Pitt, Feldman & McAnally -- was kind enough to provide with me his thoughts. I’ll get to those in a bit. [I also had the privilege of interviewing Justice Feldman in the July 16, 2014 issue of Coverage Opinions.]

The Pennsylvania Supreme Court described the Morris decision in terms of the insured’s characterization: “As noted, we granted review to consider as an issue of first impression whether an insured forfeits the right to insurance coverage when it settles a lawsuit without the insurer’s consent, where the insurer has defended the suit subject to a reservation of rights. Insureds advocate adopting the Morris fair and reasonable standard. They contend that when an insurer defends subject to a reservation of rights, an insured must be able to protect itself from the potential of an adverse and uninsured decision in the underlying tort case, if the insurer is ultimately deemed correct in concluding that the policy does not cover the claim. Further, Insureds claim that the insurer in a reservation of rights scenario is ‘in the attractive position of being able to avoid exposure either because the insured prevails at trial or because the insurer’s coverage defense is successfully asserted[.]’ Insureds contend that the Morris fair and reasonable standard provides protection for the insured by allowing the insured to accept settlement, while still preserving the insurer’s rights to contest coverage, challenge the fairness and reasonableness of the settlement including whether it resulted from fraud or collusion, and maintain control over other aspects of the defense including the choice of counsel and the defense strategy prior to settlement.”

While Justice Feldman of course could not disclose any of the Arizona high court’s discussion that led to the Morris decision, he did share with me his own thinking behind it: “[T]hink of the serious plight of an insured who has purchased indemnity along with the right to a defense and been told that the most important part of the purchase may not be performed. True, the insured can let the insurer manage the tort defense and wait for the end of the case to find out whether he will be indemnified. But the worse the result, the more likely the coverage issue will be litigated.”

But Justice Feldman was not unaware that it is a two-way street and insurers also have interests with entitlement to protection. To Justice Feldman the answer to this push and pull was a balancing of interests: “To me, Morris seems like the fairest answer to both insurer and insured. The insured is free to try to come to a reasonable settlement of the claim. The insurer will not be liable for the Morris settlement if the court finds it was unreasonable, collusive, or fraudulent, and will not be prejudiced in its attempt to show that coverage did not exist and that the reservation of rights was therefore proper.”

Besides this practical rationale for his crafting of the rules in Morris, Justice Feldman also described a more legalistic basis: “In all fairness, why should an insurer that erroneously refuses to acknowledge its duty to indemnify be entitled to control the defense and possible settlement of the case? [W]hy shouldn’t the failure to acknowledge the obligation to indemnify be considered an anticipatory breach prohibiting the insurer from later attempting to avoid the coverage that had existed by claiming that the Morris agreement was a violation of the cooperation clause? I am aware of the criticism in some of the treatises that the Morris doctrine violates the contractual agreement between the parties. But the anticipatory breach point refutes that position. Anyhow, there is not policy language that gives the insurer the simultaneous right to refuse to acknowledge the duty to indemnify while at the same time retaining the right to control the defense. Also Babcock & Wilcox is a very unusual case; in the vast majority of cases the reservation of rights letter places the insured in the position which is both dangerous and untenable. The insured has lost control of the defense and at the same time is not assured of indemnification. And in the great majority of cases is probably unaware of the danger this presents.”

A look at how the Pennsylvania Supreme Court’s adoption of Morris may play out makes it easy to see the benefits that B&W affords to insurers.

Consider an insurer defending its insured, under a reservation of rights, and trial is approaching (or maybe not). The plaintiff makes a settlement demand. Even if there is no legitimate risk of an excess verdict, the insured would still like to see the case settled, since the reservation of rights exposes it to the potential for uncovered damages. This scenario plays out – and without any difference on account of the facts and coverage issues -- just about every minute of every day in the liability claims context.

While the insured is pressing the insurer to settle, the insurer may not desire to do so. After all, the insurer, in the business of making these very decisions, may believe that the settlement demand is too high–based on its liability and/or damages evaluation. In this situation, under B&W, the insured can now settle the case – without concern that doing so will be a violation of the policy’s prohibition against voluntary payments. [Since the insured may not be financially able to settle the case, assignments of policy rights to plaintiffs may become an issue here. But that is a subject beyond the scope of this Commentary.]

Of course, some may say that the insured has just settled a case for more than it’s worth -- and is now turning to its insurer to pay up. But B&W offers insurers certain protections against this consequence. First, the insurer can challenge the fairness and reasonableness of the settlement including whether it resulted from fraud or collusion. So an insured that agrees to an overly rich settlement – even if it’s covered – takes the risk of exposure for uncovered damages.

Second, the insurer can also contest its obligation to provide coverage for the settlement. Not to mention that, under Pennsylvania law, it is unlikely that the insurer will be liable for its insured’s declaratory judgment fees, even if the insured prevails on coverage. So an insured that settles a case for too much, or even the right amount for that matter, faces the risk of not being able to recover for the settlement, as well as exposure for DJ fees that it very likely also will not be able to recover.

Third, despite the fact that the insurer defended under a reservation of rights, it may not in fact be interested in pursuing the coverage defenses. In this case, an insurer confronted with what it views as an overpriced settlement demand is protected: it can simply withdraw the reservation of rights and continue to litigate the case.

Fourth, since B&W offers insureds the right to settle a reservation of rights case without its insurer’s consent, an insured that declines to take advantage of this opportunity should be unable to challenge an insurer’s right to contest coverage in cases that proceed to trial.

Lastly, as the B&W court noted, on account of the protection afforded to insureds under Morris, they will have a much more difficult time arguing that, by being provided with a defense under a reservation of rights, they are entitled to retain independent counsel at the insurer’s expense. This is a significant benefit for insurers -- as they are constantly confronted with demands for independent counsel by their insureds.

Once B&W starts to play out in Pennsylvania, insureds will find themselves confronted with the old adage: be careful what you wish for.

My opinion concerning the score in B&W stands in contrast to that of a commentary in Law360, by Drinker Biddle Philadelphia attorneys Jason Gosselin and Timothy O’Driscoll, who saw it differently. Their commentary concluded that “[t]he Pennsylvania Supreme Court fashioned a new and dramatic rule favoring policyholders and harming insurers and it did so while openly disregarding clear policy language.” In addition, in the September 30th issue of CO, Bill Barker of Dentons US LLP in Chicago wrote over a thousand words why my analysis of B&W is wrong.

[Disclosure: I, along with two colleagues, filed an amicus brief with the Pennsylvania Supreme Court, in Babcock & Wilcox Company v. American Nuclear Insurers, on behalf of an insurance industry trade association, in support of ANI’s position.]

Insurers have long been writing endorsements to reduce their exposure for property damage caused by construction defects. These efforts have been taking place with First Manifestation, Loss in Progress and similarly named endorsements. In addition, popular these days are exclusions for an insured if it fails to have itself named as an additional insured on a subcontractor’s policy.

Of course, insurers also face enormous exposure for bodily injury on construction sites. Recently, they have been attempting to reduce this exposure as well. The effort, growing in frequency by my anecdotal estimate, has come about in the form of endorsements that preclude coverage for bodily injury sustained by an employee of a contractor or subcontractor. However, under some of these endorsements, the injured party need not have been working for a subcontractor that was retained by the insured. Rather, the exclusion applies if the injured party was employed by any contractor or subcontractor on the project. Since the people most likely to be injured on a construction site, especially one closed to the public, are employees of a contractor – some contractor, any contractor, even one with nothing to do with the insured -- it is easy to see the breadth of such an exclusion.

In general, insurers have been winning the cases where such exclusions have been at issue. In some cases, the breadth of the exclusion has not gone unnoticed by the insureds and courts. Nonetheless, courts have rejected the insureds’ argument that, what the exclusion must have meant, is that it applied only to independent contractors and subcontractors of the insured and not just any independent contractor or subcontractor on the project. However, courts have been willing to uphold such exclusions because the claims before them fall within the policy language.

But not all courts have been so generous to insurers. Put the Fifth Circuit in that category after its decision in United States Liability Insurance Company v. Benchmark Insurance Services.

Homeowners hired general contractor Benchmark to renovate their Newton, Massachusetts home. The homeowners hired architect Thomas Huth. Huth hired Sara Egan to apply decorative painting to one of the interior walls. Meghan Bailey, an employee of Egan, did the job. While Bailey was applying the decorative paint, she fell from a ladder that was positioned on top of scaffolding.

Bailey sued Benchmark. Benchmark sought coverage from its insurer, USLIC, under a commercial general liability policy. USLIC determined that the following endorsement – “stripped of language not relevant” -- precluded coverage:

“Bodily injury” to any ... “employee” ... of any contractor ... arising out of ... rendering services of any kind ... for which any insured may become liable in any capacity[.]

The district court found for USLIC because the exclusion excludes injuries to contractors’ employees who are injured while performing services. “Although the insurance policy does not provide a definition of ‘contractor,’ the court held that ‘contractor’ unambiguously means ‘anyone with a contract.’ Since Bailey’s boss, Egan, had contracted to do the decorative painting, Bailey was a contractor’s employee and her claims are subject to the exclusion.”

But here’s the rub. Benchmark had no contractual relationship with Huth, Egan or Bailey and Bailey’s work was not performed under a contract with any of Benchmark’s contractors or subcontractors.

The Fifth Circuit reversed the District Court. The appeals court had a couple of reasons for doing so. But the one that is most likely to have applicability to other cases is this: ambiguity in the word “contractor” – a word not defined in the policy.

The District Court held that “contractor” unambiguously means “anyone with a contract.” Since Egan had a contract to apply decorative paint to the interior wall, Egan was a contractor. And Bailey, as Egan’s employee, was therefore a contractor’s employee, bringing her claims within the scope of the exclusion.

Benchmark’s argument was that “contractor” means someone with a contract with the insured, i.e., someone Benchmark hires but who is not Benchmark’s “employee.” The Fifth Circuit held: “We are persuaded that reasonably intelligent people may differ about the meaning of the word ‘contractor,’ and hence the word is ambiguous. ‘Anyone with a contract’ is surely a reasonable definition of the word ‘contractor,’ as the district court found, but so is a more narrow definition focused on the contractual relationship of the injured party and the insured.”

Faced with this ambiguity, the court turned to the reasonable expectations of the insured and concluded that it supported the definition Benchmark advanced. “As Benchmark argues, defining ‘contractor’ as ‘anyone with a contract’ ‘makes a dice roll of every bodily injury claim, based on whether the injured party happened to be working under any contract no matter how attenuated to the insured’s work.’”

The court also found support for its decision in the purpose of commercial general liability insurance: “[T]his type of policy provides coverage for liability arising out of torts to third parties, as distinguishable from injuries that befall the insured’s own employees. Since the word ‘contractor’ is being used in a provision we have described as an employer’s liability exclusion, it makes sense to define ‘contractor’ as someone with a contract with the insured. A reasonable insured would expect the contractual relationship between the insured and the injured party to govern the applicability of an employer’s liability exclusion to a given injury.”

The appeals court reversed the District Court because “Bailey’s boss, Egan, was not retained by Benchmark, and so Bailey is not a contractor’s employee within the meaning of the exclusion.”

Benchmark does not mean that insurers are never going to win cases based on exclusions that apply if an injured party was employed by any contractor or subcontractor on the project – even ones with no relationship to the insured. But the thoroughness of the opinion, and coming from a respected court, is likely to give more courts pause before applying such exclusions – no matter how clearly they may apply on their face.

Excess Insurer Need Not Initiate Settlement Negotiations –
Even When Primary Insurer Must

As discussed above, in the context of the Louisiana Supreme Court’s decision in Kelly v. State Farm, when a demand to settle within the insured’s limit of liability is never made, insurers generally see themselves as relieved of any risk of exposure for an excess verdict. After all, even if the insured has a legitimate risk of personal liability for a verdict above its policy limit, the insurer’s hands are tied. Right? Without a demand to settle within the insured’s limit of liability, what’s it to do? No matter how much it makes sense to settle the case, the opportunity to do so just isn’t there.

Granted, that’s not always true. In some states, such as Oklahoma, the “duty of good faith and fair dealing requires primary insurers to do more than ... simply not refuse unconditional settlement offers within [its policy] limits. [I]f an insured’s liability is clear and the injuries of a claimant are so severe that a judgment in excess of policy limits is likely, a primary insurer has an affirmative duty to initiate settlement negotiations.” SRM, Inc. v. Great American Insurance Co., 798 F.3d 1322 (10th Cir. 2015) (citations and internal quotes omitted).

In SRM, Inc. v. Great American, the Tenth Circuit examined, in detail, whether Oklahoma’s rule, applicable to primary policies, also requires excess insurers to take that same affirmative step.

The court describes the facts like this: At a rail crossing in rural Oklahoma, “a Union Pacific Railroad train t-boned an SRM dump truck as the truck crossed the tracks in the path of the oncoming train. The collision killed the truck driver and derailed the train causing extensive damage to the train’s engines, its cars, and three of its workers.” The three injured train workers sued Union Pacific, SRM, and SRM’s primary auto insurer. SRM’s excess liability insurer, Great American, “received notice of the claims and monitored the case for potential exposure under its umbrella policy.”

SRM’s personal attorney demanded that the primary and excess insurers tender their respective limits to settle the case. He asserted that the injured train workers’ claims alone would exceed the $6 million in combined liability coverage. The primary insurer was willing to offer its $1 million liability limit to Union Pacific to settle that claim, “or to tender its limit to SRM and Great American for their use in negotiating a settlement with Union Pacific and/or the other claimants. But Great American rejected that approach and urged an aggressive defense.”

After court rejected SRM’s cross-claim and best defense, personal counsel renewed his demand that Great American tender its $5 million policy limit to settle the case. “He warned that any delay in tendering the entire $6 million available for settlement might make it impossible to settle at a later date. Great American again declined, stating it required additional discovery to properly evaluate the claims and suggesting the claims would be resolved in mediation after discovery was complete.”

Before mediation, the primary insurer’s-retained defense team “revised its estimate of potential exposure to be between $4–4.5 million and $7 million. A Great American-retained attorney estimated economic damages at roughly $8 million, but estimated a jury would award between $2 and $4.65 million. At the mediation, the plaintiffs initially demanded $20 million but later in the day reduced their demand to $6.5 million. Great American countered with $450,000. . . . A week later, the case settled for $6.5 million. The primary insurer paid $1 million; Great American paid $5 million and SRM paid $500,000.

SRM sued Great American. It’s argument was simple: if Great American had investigated the claims, and initiated settlement negotiations by tendering its policy limits earlier in the litigation, the case would have settled within the $6 million policy limits. In other words, SRM would not have been required to pay $500,000 to settle the claims. SRM argued that Great American’s failure to take these actions violated the insurer’s implied duty of good faith and fair dealing.

But the court concluded that Great American had no such duty. It reached its decision based on strong reliance on the language of the Great American policy: “As the district court correctly concluded, the policy was unambiguous: Great American’s contractual duties to investigate, settle, or defend claims against SRM did not kick in until SRM’s primary insurer exhausted its policy limits by actually paying claims.” But, the court observed, this did not happen until the primary insurer paid its respective policy limits to settle the claims against SRM. “At that time, Great American fully discharged its contractual obligations by simultaneously contributing its policy limits toward settling the case.”

SRM sought to overcome this policy-language based argument by resorting to an “implied duty” – “[T]he duty of good faith and fair dealing is . . . independent of policy language, and therefore applies equally at all times to all insurers—whether primary or excess—regardless of when an insurer’s express contractual duties to the insured kick in.” But the court rejected the “implied duty” argument, concluding that the language of the Great American policy was paramount.

When all was said and done, the court held that, at most, an excess insurer’s duties are limited to considering and evaluating a reasonable, within-limits settlement offer.

The SRM court’s decision is entirely justifiable based on the policy language rationale. However, it is not difficult to imagine a court, in a state that imposes an affirmative duty on a primary insurer to initiate settlement negotiations, when an insured’s liability is clear, and a judgment in excess of policy limits is likely, to turn around and impose the same affirmative duty on an excess insurer. A court that imposes this duty on a primary insurer may not have a difficult time concluding that, despite what the policy language may say, the duty of good faith and fair dealing is independent of policy language and, therefore, applies equally to all insurers. A court may conclude that, to have the duty apply to the primary insurer, but not the excess insurer, may not achieve the objective being sought.

I have long maintained that the Supreme Court of Texas is the most important in the country when it comes to liability insurance coverage matters. So just as it was with E.F. Hutton, when the Supreme Court of Texas talks, well, you know.

Late in the year, as the Top 10 was in its final stages, and with one spot still open, and several cases vying for it, the Texas Supreme Court decided U.S. Metals, Inc. v. Liberty Mutual. The fat lady sang.

The decision is brief – mercifully, as I was getting antsy to be done – and addresses the “impaired property” exclusion in a products liability scenario. But the case’s impact will be felt so much further.

The claims at issue in U.S. Metals are no doubt highly complex and technical from an engineering standpoint and could probably take up pages to explain. But Chief Justice Hecht does a great job of laying out the facts in three paragraphs. I’d be crazy to not simply quote them here verbatim:

“U.S. Metals, Inc. sold ExxonMobil Corp. some 350 custom-made, stainless steel, weld-neck flanges for use in constructing nonroad diesel units at its refineries in Baytown, Texas, and Baton Rouge, Louisiana. The units remove sulfur from diesel fuel and operate under extremely high temperatures and pressures. ExxonMobil contracted for flanges made to meet industry standards and designed to be welded to the piping. The pipes and flanges, after they were welded together, were covered with a special high temperature coating and insulation.

In post-installation testing, several flanges leaked. Further investigation revealed that the flanges did not meet industry standards, and ExxonMobil decided it was necessary to replace them to avoid the risk of fire and explosion. For each flange, this process involved stripping the temperature coating and insulation (which were destroyed in the process), cutting the flange out of the pipe, removing the gaskets (which were also destroyed in the process), grinding the pipe surfaces smooth for re-welding, replacing the flange and gaskets, welding the new flange to the pipes, and replacing the temperature coating and insulation. The replacement process delayed operation of the diesel units at both refineries for several weeks.

ExxonMobil sued U.S. Metals for $6,345,824 as the cost of replacing the flanges and $16,656,000 as damages for the lost use of the diesel units during the process. U.S. Metals settled with ExxonMobil for $2.2 million and then claimed indemnification from its commercial general liability insurer, Liberty Mutual Group, Inc., for the amount paid.”

Liberty Mutual denied coverage. Essentially before the court (on certification from the Fifth Circuit) -- under the “convoluted provisions of the standard-form CGL policy,” as the Chief described it – was the applicability of the impaired property exclusion (first acknowledging the obligation for “property damage” under the CGL insuring agreement). The impaired property exclusion reads:

“Property damage” to “impaired property” or property that has not been physically injured, arising out of ... [a] defect, deficiency, inadequacy or dangerous condition in “your product.’”

“Impaired property” means: tangible property, other than “your product” ..., that cannot be used or is less useful because: a. It incorporates “your product” ... that is known or thought to be defective, deficient, inadequate or dangerous; or b. You have failed to fulfill the terms of a contract or agreement; if such property can be restored to use by the repair, replacement, adjustment or removal of “your product” ... or your fulfilling the terms of the contract or agreement.

The court described the issues as follows: “[I]s property physically injured simply by the incorporation of a faulty component with no tangible manifestation of injury? And second: is property restored to use by replacing a faulty component when the property must be altered, damaged, and repaired in the process?”

Turning to the “incorporation” issue, the court noted that different approaches exist nationally and then chose to follow the majority view: “We agree with most courts to have considered the matter that the best reading of the standard-form CGL policy text is that physical injury requires tangible, manifest harm and does not result merely upon the installation of a defective component in a product or system.” Thus, the conclusion of the court was that the installation of U.S. Metals’s faulty flanges, into the ExxonMobil units, did not physically injure them.

But while the diesel units were not physically injured merely by the installation of U.S. Metals faulty flanges, there is another part to the story: the units were physically injured in the process of replacing the faulty flanges. “Because the flanges were welded to pipes rather than being screwed on, the faulty flanges had to be cut out, pipe edges resurfaced, and new flanges welded in. The original welds, coating, insulation, and gaskets were destroyed in the process and had to be replaced. The fix necessitated injury to tangible property, and the injury was unquestionably physical.” Thus, as the court laid it out as clear as a bell: “[T]he repair costs and damages for the downtime were ‘property damages’ covered by the policy unless [the impaired property] exclusion applies.”

So now it was time to delve into the “impaired property” exclusion – not so clear as a bell. The impaired property exclusion is that one that you kinda, sorta, understand, but not really, and try to avoid having to deal with it at all costs. Here is how the impaired property exclusion was described by Austin’s Shidlofsky Law Firm in a U.S. Metals case alert: “[the] exclusion as a whole is utterly confusing and requires several shots of Tequila before it even remotely makes the slightest bit of sense. To the extent that you try this route in analyzing the ‘impaired property’ exclusion, please do not operate a vehicle or heavy machinery. And, if you have a headache for more than four hours, call a doctor.” [The boys from Shidlofsky Law are superb coverage lawyers; so what hope do the rest of us have?]

U.S. Metals argued that the impaired property exclusion did not apply for this reason: “[I]f the flanges had been screwed onto the pipes, removal and replacement would have been a simple matter, readily restoring the diesel units to use, and making them ‘impaired property’. But because the flanges were welded in, U.S. Metals argues, restoring the diesel units to use involved much more than simply removing and replacing the flanges alone, and therefore the diesel units were not ‘impaired property’ and Exclusion M does not apply.”

The Texas Supreme Court disagreed: “The policy definition of ‘impaired property’ does not restrict how the defective product is to be replaced. U.S. Metals argument requires limiting the definition to property ‘restored to use by the ... replacement of [the flanges]’ without affecting or altering the property in the process. That limitation cannot be fairly inferred from the text itself, nor would it make sense to do so. In U.S. Metals’ view, the diesel units could not be restored to use by replacement of the flanges, not only because they had to be cut out and welded back in, but because of the wholly incidental replacement of insulation and gaskets. Coverage does not depend on such minor details of the replacement process but rather on its efficacy in restoring property to use. The diesel units were restored to use by replacing the flanges and were therefore impaired property to which Exclusion M applies. Thus, their loss of use is not covered by the policy.”

However, the court did acknowledge that “the insulation and gaskets destroyed in the process were not restored to use; they were replaced. They were therefore not impaired property to which Exclusion M applied, and the cost of replacing them was therefore covered by the policy.”

U.S. Metals is a brief opinion but Chief Justice Hecht made the most of the words and I believe that they will be heard far and wide into the future.

In my experience, insurers have shied away from asserting the “impaired property” exclusion for the very reason that U.S. Metals provided (and which was rejected): since flanges had to be cut out and welded back in, the diesel units could not be restored to use simply by replacement of the flanges. In other words, as U.S. Metals conceded: “[I]f the flanges had been screwed onto the pipes, removal and replacement would have been a simple matter, readily restoring the diesel units to use, and making them ‘impaired property.’” U.S. Metals, especially coming from the Texas Supreme Court, is likely to cause some insurers to take another look at the impaired property exclusion in these product liability “incorporation” situations.

But the bigger impact may be felt in the context of the more common construction defect landscape. Consider an insured-contractor’s defective work on a building. There is no coverage for the cost to replace the insured’s faulty work (no “occurrence” or the “your work” exclusion applies). That much we know. But will U.S. Metals now cause insurers to argue that the impaired property exclusion precludes coverage for any loss of use damages, since the building can be restored to use by the repair/replacement of the insured’s faulty work, notwithstanding that other parts of the building are damaged in the process? Incidentally, that the court held that coverage existed for the insulation and gaskets destroyed in the process was no small victory for policyholders. Is the court saying that, in a construction defect case, “rip and tear” costs are covered property damage when on account of uncovered repair and replacement of faulty workmanship?

Vol. 4, Iss. 12
December 16, 2015

• Vermont Supreme Court: Pollution Exclusion Precludes Coverage For Bed Bugs’ Pesticide
The Vermont Supreme Court held in Whitney v. Vermont Mutual Ins. Co., No. 2015-073 (Vt. Dec. 11, 2015) that the Pollution Exclusion applied to a claim for “property damage” caused by the spraying of a pesticide in a home in an attempt to eradicate bed bugs: “The undisputed facts are that chlorpyrifos is: toxic to humans; can cause nausea, dizziness, confusion, and at very high exposures, respiratory paralysis and death; and is banned for residential use. Triple A’s use of chlorpyrifos in the Whitneys’ home violated EPA regulations, and federal and state law. The concentration levels of the substance in the Whitneys’ home were consistently high relative to the EPA ‘action level’ at which the EPA has determined that cleaning of housing units is required. As a result of the contamination, the Whitneys have been unable to live in their home. We do not find it hard to conclude that, in the context of this case, the terms ‘irritant,’ ‘contaminant,’ and ‘pollutant’ plainly and unambiguously encompass the chlorpyrifos sprayed ‘corner to corner, wall to wall’ throughout the Whitneys’ home. As we have previously noted, ‘we cannot deny the insurer the benefit of unambiguous provisions inserted into the policy for its benefit.’”